Talking to Reporters about Mortgages

News ReporterI spend a fair amount of time speaking with journalists who are working on stories about the housing and mortgage industry. I like to help out, and it does give one a bit of an ego boost to see your name in print as an authority.

Recently, I spoke to Geoff Williams, a reporter for U.S. News and World Report. His angle was about buying a home without flawless credit. He wanted to explore the avenues available to those would-be home buyers who were actually human, with a few blemishes on their credit reports. “How good does a buyer’s credit actually have to be to get a loan?” he wanted to know.

That prompted me to say this:

“There has been a false narrative circulating ever since the meltdown of 2008 – that even though interest rates are great, almost nobody can qualify, since the banks pick only the most squeaky-clean borrowers. This is so far from the truth as to be almost ludicrous, except that it becomes a sort of self-fulfilling prophecy, where imperfect would-be buyers stay out of the market for fear of rejection.”

I was happy to see that he printed that quote in its entirety.

I’ll be speaking and writing about this harmful untruth a lot more in the future. Stay tuned.

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The Horror of the FHA Mortgage

Julián Castro

HUD Secretary Julián Castro

I came across an article recently in one of the mortgage industry trade rags: “Republicans Hammer Castro over FHA Premium Reduction.”

A little backstory: FHA is a federally insured loan program that requires a small down payment (currently 3.5%). It has helped million of people buy homes since its inception in 1934. The small down payment means more risk for the lender, so the buyer pays mortgage insurance to limit the lender’s risk. That insurance consists of an initial payment of 1.75% and, until recently, a monthly premium of 1.35%. The initial payment is typically added to the loan, so it does not come out of the borrower’s pocket.

With the crash of 2008, many people lost their homes to foreclosure, and there were billions of dollars of claims. The claims involving FHA loans depleted the MI fund below its congressionally mandated level of 2%. FHA’s response to this problem has been to raise mortgage insurance premiums to their present high levels to replenish the insurance pool. In doing this, they lost a great deal of market share to conventional loans, whose mortgage insurance is often less costly than FHA’s.

HUD Secretary Julián Castro pushed through a reduction of monthly MI to 0.85%, a half percent lower than the previous 1.35%. Surprise: FHA originations increased.

Jeb Hensarling

House Financial Services Chair Jeb Hensarling (R-TX)

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said the FHA needed to wait until its reserve fund reached its statutory minimum of 2% before enacting any cuts. “This cannot be allowed to stand!” he thundered, perhaps pounding the lectern and shaking the C-SPAN cameras. His colleague, Rep. Scott Garrett (R-N.J) piled on, saying that FHA loans have “predatory characteristics” (low down payments). The reduction in premiums would “entice people” to take these kinds of loans to save “$25-$50.”

Rep. Scot Garrett (R-NJ)

Rep. Scot Garrett (R-NJ)

Wow. Just…wow. Doing the math, that 0.50% reduction in premium will save a borrower with a $183,000 loan (the nationwide average) over $76.00 per month.

“Don’t you care about these people?” Rep. Garrett co-thundered. “Are you so inclined to write more loans that you are just trying to entice them for $20 or $30 to get into a house that they can’t afford?” (This from a man who earns $174,000 a year, plus expenses, perks and benefits).

Secretary Castro replied, “I assume intelligence in the American people.” (Slow clap)

This exchange demonstrates a good part of what has been wrong with our housing finance market. First, many of the policies have been set by very affluent people—typically wealthy older white men—who have no understanding of how people buy and finance homes. Raising the cost of mortgage insurance, for example, caused FHA mortgages to be much less attractive to borrowers, so FHA lost market share to conventional mortgages with private mortgage insurance. This is part of what slowed the replenishment of the insurance pool. According to Secretary Castro, FHA is now on track to have the pool fully compliant within two years.

Second, judging by the comments of these two politicians, they have no understanding of how a lender actually underwrites and approves a mortgage. They seem to believe that reducing the cost of a mortgage will somehow cause it to become a sort of attractive nuisance to attract irresponsible borrowers who will default on their obligation.

It appears to me that this recent reduction in the FHA insurance premium is a glimmer of hope in housing policy. Rather than shifting blame for the recent mortgage meltdown from the investment banks (Goldman Sachs et al), who created the toxic loan products, to hapless borrowers, there seems to be at least some movement towards a more common-sense housing policy—at least as far as FHA is concerned.

I’m going to call that a good start.

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Are mortgage credit standards really too tight?

app denied stampEarlier this week, Geoff Williams, a reporter for U.S. New and World Report, asked me for my opinion about current credit standards set by mortgage lenders, and whether someone with less-than-stellar credit could actually get a loan to buy a home. Here’s what I told him:

There has been a false narrative circulating ever since the meltdown of 2008 – that even though interest rates are great, almost nobody can qualify, since the banks pick only the most squeaky-clean borrowers,” says Joe Parsons, a managing partner at PFS Funding, a mortgage lender in Dublin, California. “This is so far from the truth as to be almost ludicrous, except that it becomes a sort of self-fulfilling prophecy, where imperfect would-be buyers stay out of the market for fear of rejection.

This “false narrative” has been a sore point with me for years, since it inhibits so many people even from making the attempt to buy a home. I’m happy that Geoff took on this issue in a national magazine. Expect more articles on this topic from me in the coming months.

You can find Geoff’s story, “How to Get a Home Loan With Less-Than-Stellar Credit,” at http://money.usnews.com/money/personal-finance/articles/2015/01/30/how-to-get-a-home-loan-with-less-than-stellar-credit

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The CFPB’s New “Mortgage Tool” is a near miss

CFPB Clark Kent/SupermanThe Consumer Financial Protection Bureau (CFPB), has recently released a suite of tools for consumers who are thinking about buying a home. The concept is good; in my 25 years as a mortgage lender, I have spent a great deal of time educating the public about basic financial principles.

Here’s where CFPB has missed the mark: one of the tools they provide is called “Check interest rates for your situation.” CFPB claims, “Our data comes from actual lenders and is updated every day.” The user enters a loan amount, down payment, state and credit score and will see a range of interest rates and the number of lenders in the survey offering those rates.

This sounds like a good idea, but it misses the mark in a couple of important areas. The data CFPB delivers with their well-intentioned site can be misleading.

First, the rates generated are (I presume) APRs, which are very different from the note rate. This is because discount points, paid up front to reduce the interest rate, are part of the APR calculation. Here’s what I mean:

A $400,000 mortgage at 3.625% and no discount points will carry an APR of around 3.689%.

The borrower could get the same mortgage with an APR of 3.309% (note rate 3.25%)—but they’d pay 2.8% of the loan amount to get that rate. CFPB’s model doesn’t consider this.

They also disregard the potential cost of mortgage insurance. A buyer with a credit score of 740 and a down payment of 10% will pay mortgage insurance of .44%. That would amount to $132 a month. A buyer with a 680 score would pay $171 for insurance on the same loan.

Furthermore, they don’t take into account many other factors that affect interest rate: is the loan for a purchase or refinance? Is the borrower taking cash out? Will they have an impound account? All will affect the cost of the loan.

CFPB suggests that the consumer should negotiate with three lenders or more, getting Good Faith Estimates from each one, then using those documents as a negotiating tool. There are two problems with this: first, the GFE is not a useful consumer document. It does not itemize the actual costs of the loan paid by the borrower. Second, under the current Dodd/Frank regulations, lenders cannot do ad-hoc price reductions for individual borrowers. This is true for brokers and direct lenders as well.

Finally, the comparison tool (although it is a good start) disregards other costs and fees that can change from one lender to the next. Lenders with the lowest price (like on-line call-center mortgage brokers) often have other costs and fees that are not reflected in the GFE.

What is useful in CFPB’s mortgage tool is the credit score slider. All lenders use “risk-based pricing” today. This means that a borrower with a lower credit score will pay a higher rate than one with a higher score. We have seen many instances where raising a borrower’s FICO score by just 5 points has saved literally thousands of dollars on their loan.

In fairness, the mortgage tool is a Beta version. This means they recognize it as a work in progress. Still, with the complexity of the mortgage process, the fact remains that the best way to decide on the best mortgage choice for you is an experienced, trusted mortgage advisor.

I happen to know one of those guys.

 

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Will changing mortgage insurance fix FHA?

FHA vs Conventional dilemmaFHA loans are about to get a little less unattractive (yes, I know that’s a double negative. I did it on purpose).

Since 1934, millions of people have become homeowners because of the Federal Housing Administration’s (FHA) loan programs. The combination of low down payment requirements (presently 3.5%) and flexible underwriting standards has made FHA a very attractive program to many.

FHA insures these low down payment loans by collecting mortgage insurance, paid in an up-front premium added to the loan balance, plus a monthly premium. This money goes into a fund to pay claims to lenders as required.

Since the housing crisis, however, with its epidemic of foreclosures, the insurance fund has shrunk to dangerous levels. FHA’s response has been to increase cost of its mortgage insurance; at present, the initial premium is 1.75% of the base loan amount, added to the loan. The monthly premium is 1.35%. This means that buying a home for $300,000 would require a cash down payment of $10,500 (3.5%) and an up-front MI premium of $5,066. The total loan amount would be $294,500.

Interest rates for FHA are lower than for conventional loans; today’s rate for an FHA loan would be 3.375%, while an equivalent conventional loan would likely carry a rate of 3.75%.

A conventional loan would require mortgage insurance, as well. Depending on the buyer’s credit score, the monthly premium would be between $270 and $370 per month for the conventional loan. FHA’s premium would be $331. The payment for that $300,000 home would be $2,060 with an FHA loan, $2,044 for a 97% conventional.

Yesterday, Julian Castro, the secretary of the Department of Housing and Urban Development, announced that FHA would cut its monthly MI premium by .5%, to .85%. This will reduce the monthly payment on a $300,000 home to $1,940—a drop of $120 a month.

While this will enable FHA to regain some of the market share it has lost to conventional loans, it doesn’t address the real problem: the mortgage insurance stays in place for the life of the loan. The only way to get rid of it is to refinance and pay it off. By contrast, a borrower can eliminate private mortgage insurance (PMI) once equity reaches 20%. Assuming a modest 4% appreciation rate, that will take about three years. Then, the conventional mortgage will be quite a lot cheaper than the FHA version: $1,775 per month instead of $1,940—$163 less each month.

There are some other variables, like credit scores, that can make an FHA loan a reasonable choice. Any buyer should do a careful comparison of all possible scenarios before committing to either one.

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The real story about mortgage rates

You already know rates are low. Here’s how low they are today, how they got that way, and what you should do now.

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Sorry, Mr. Bernanke; your loan is denied.

bernanke sad“My loan is WHAT?” The voice on the other end of the line was shrill—very different from the measured tones most of us had heard from the Chairman of the Federal Reserve, the central bank of the United States of America. I had taken a loan application from former Chairman Ben Shalom Bernanke. He had sent me his bank statements, tax returns for 2012 and 2013, copies of driver’s licenses for him and Anna, his wife. He wanted to refinance his three-bedroom home on Capitol Hill. He had applied for a new loan of $625,000.

“I’m sorry, Ben,” I said. I felt like a big shot, calling a guy who had been one of the most powerful men on the planet by his first name. “You were a W-2 employee at the Federal Reserve for eleven years, but you went self employed in February, when you handed the keys to Janet Yellen.”

“Do you have any idea how much they pay me to give a speech?” he said. “I get a quarter of a million bucks just to stand up and run my mouth for half an hour! I’ve done six so far this year, and my agent has me booked through all of next year. I’m doing much better than the $200k I made at the Fed! So what’s the problem?” I could hear his exasperation.

“Here’s the problem,” I said. “You’ve only recently become self employed, and you’ve moved from being an economist and banker to being a professional speaker and consultant. As far as the lender is concerned, you’re now in a different line of work. It doesn’t matter how much you’re making; as far as they’re concerned, your income from speaking, plus the million-dollar book advance you got, not to be income that is likely to continue. I’m sorry, but that’s going to be the same with any lender.” I heard a loud sigh from his end, then a muttered imprecation.

“So there’s no way to do this?”

“Well, we could do an ‘asset depletion’ loan. I’m sure you have plenty of liquid assets. The only problem is that it’s a lot more expensive than a standard Fannie Mae-Freddie Mac loan. Or you could wait until next year, send me your 2014 tax return and go on that.”

“I’ll pass on that,” he said. “I think I know how I can make this work for me anyway.” I expressed my disappointment at not being able to help him and we said our cordial good-byes.

The next day, I saw headlines all over the media:

FORMER FED CHIEF DENIED MORTGAGE. BLAMES OVER-REGULATION.

I got an email invitation from him the same day. Did I want to attend his next speech? His topic, which was getting a lot of attention, was this:

“How excessive regulation is keeping qualified borrowers out of the market”

After the press coverage he had gotten after having his mortgage application denied, he was speaking to sellout crowds.

That Ben: lands on his feet every time.

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Staying Safe on the Long Run (Chronicles of Running)

distance runningAll runners know that the foundation of training for a distance event like the marathon–and shorter distances as well–is the Long Run. “If you want to run fast, run far” is the time-honored advice.

Two Sundays ago, as I set off on my then-longest run of 8.6 miles, those words resounded in my brain as I struggled through the last two miles of my Long Run. I had planned to cover the distance in just under two hours, but found myself still plodding along after 2 hours, 20 minutes. As I gratefully turned the corner to my own street, I saw my wife pulling out of the driveway.

“I was coming to find you,” she said, more than a little irritated. “I didn’t know whether you’d been hit by a car or had a heart attack!” I realized that her concerns weren’t just the alarmist concerns of a non-running spouse; there is indeed a lot that can go wrong on the Long Run.

It occurred to me that I should have done two things to ease her concerns in advance. First, I should have shown her my planned route. I am not one of those runners who sets out without a plan. I always know where and how far I plan to run, and what my pace should be.

The second thing I should have done (and always will do in the future) was to give her a way to track my location in real time. Fortunately, this is trivially easy to do. There is a useful (and free) app on my phone called Life360. Once I enable “Location Sharing,” anyone I’ve added to my Circle can see exactly where I am.

This does wonders for peace of mind.

There are so many things that can go wrong when we are racking up our miles–and since distance running is so often a solitary undertaking, giving people who care about us a way to know we are safe is an important consideration. Any time I get into a small airplane, I file a flight plan so others know where I am. It makes sense.

Today, as I came to the end of a 10.75 mile run, my wife was in the driveway, cheering me. “I watched you turn the corner on my phone!” she said. “I got lunch ready for you.”

Now I file a “run plan” when I set out, and turn on Life360.

It makes sense.

Disclosure: I have received no compensation from Life360, and one of its key employees happens to be my daughter. The app is free, easy to use and takes up very little space on my phone. You should get it for your Android,  Windows or iPhone.

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FHA Mortgage—The Wrong Choice?

real-estate-seesawThe venerable FHA loan has been an important path to home ownership for moderate-income buyers since 1934, when it came into being as part of the National Housing Act. Since that time, some 35 million families have used the federally insured mortgage program to become homeowners with very small down payments.

FHA became even more prominent in the recent crisis, as loans for borrowers with lower credit scores disappeared overnight. As the country lurched out of the Great Recession, FHA found that their insurance pool to cover foreclosure losses was drying up. They decided that increasing the insurance premiums would be the best way to replenish it and preserve the program.

FHA’s mortgage insurance premiums have been marching higher for several years. At present, there is an initial premium of 1.75% added to the “base” loan amount, plus 1.35% paid monthly. For a $300,000 purchase, this amounts to $5,066 initially, and $331 paid monthly. Although it was once possible to eliminate the insurance after about 10 years, FHA mortgage insurance is now permanent. The only way to remove it is to refinance into a conventional loan.

Even though interest rates for FHA loans are lower than for conventional mortgages, they are still a very costly option for most homeowners. A buyer with a credit score of 720 will get a conventional mortgage at a rate of around 4.5% (no points). With a down payment of 5%, that borrower can expect a monthly mortgage insurance premium of $270 (.69%)—and the lender will allow the insurance to be canceled once the loan reaches 80% of the home’s value. If the property appreciated at 4% per year, the buyer would be able to drop the mortgage insurance in less than three years.

The FHA loan would have a slightly lower interest rate—3.75% with no discount points—but the buyer would add the $5,066 initial premium to the loan, in addition to paying a monthly premium of $331. The buyer with a conventional loan will pay only slightly more initially:

MI compareEven though the conventional payment is $107.00 higher, the buyer will be able to drop the mortgage insurance within two or three years, depending on appreciation. Once that happens, the difference is significant: while the FHA buyer will be saddled with costly mortgage insurance for as long as he has the loan, the conventional buyer’s payment will drop to $1,444—$252 lower than for FHA.

An FHA loan is useful in certain cases. There are adjustments to the rate for lower FICO scores, so a buyer whose credit scores show some battle scars may still be better off with the government insured program. There may also be those who are struggling just to save the 3.5% down payment. For those hopeful buyers, the additional 1.5% in down payment could be a major hurdle.

Still, every buyer entering the market should be aware of the real cost difference between FHA and conventional loans. Saving up the additional 1.5% down payment could be a good investment.

 

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Getting Real (Chronicles of Running)

roger and me

Roger and Me. That’s Roger Bannister on the left, crossing the line in under 4 minutes for the mile. That’s me on the right, 55 seconds slower–and 9 years after his historic run.

Years ago, as I was embarking on a selling career, I learned that success involved setting goals—audacious ones. Even possibly unattainable ones. A “goal” that was like an Easy A class wouldn’t count; there has to be the real possibility of failure.

I learned that this goal (sometimes called a BFHAG, for Big Fat Hairy Audacious Goal) had to be specific. It also had to be written down and consulted regularly.

One more thing: you had to make it public. You couldn’t just put your goal on a post-it and stick it under your blotter. You had to open yourself not only to the possibility of failure but of public failure. Where the mind (and legs) feel like quitting, the ego may carry us through.

People who know me are aware of my rekindled passion for running. I have mentioned to some friends that I have been considering the commemoration of my 70th birthday next year (gulp) by running a marathon. That’s a little jaunt of 26 miles, 385 yards, kids. If I hit my goal time, that means putting one foot ahead of another without stopping for 4 hours, 25 minutes.

The goal has been somewhat nebulous up to now; my birthday is March 20th, and there are plenty of races in 2015. Maybe next October? November? That’s a LONG way away.

Except: Modesto. March 29, 2015. The date is right. There are no hills. The weather will be perfect. I have time to train—7 months.

There are no excuses—so Modesto it is. Now all my thousands hundreds several fans and followers know it, too.

Oh, and I almost forgot to mention: it’s a sanctioned Boston Qualifier race. That means if I hit my goal time (4:25), I’d be eligible to enter the most revered race of all: Boston.

Sh*t’s getting REAL now.

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